The case for investing in companies with Employee Stock Purchase Plans

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Employee Stock Purchase Plans (ESPPs) provide significant opportunities for America’s working class to build wealth. These plans are purpose-built to help employees achieve greater financial security through company stock ownership. They were created in 1964—fourteen years before the creation of 401(k) plans—as a method to make stock ownership more accessible, yet today they remain heavily underutilized.

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Nearly half of S&P 500 and 40% of Russell 3000 companies offer an ESPP. While ESPPs provide wealth building opportunities for employees, data shows that their presence as part of a company’s benefits package is also generally accretive for shareholders, especially in the technology, healthcare, and financial services sectors.

For the last five years, public companies that offer stock purchase plans to their employees have routinely outperformed those which do not[1]. As value investors continue to search for opportunities in a volatile, overheated market, companies that offer ESPPs may provide stronger growth trajectories at more reasonable prices.

Excess Return On Equity

When comparing a market-cap weighted index of companies with ESPPs against those without, the ESPP index has a return on equity of nearly 12% compared to 7%.1, 2 The nearly 70% ROE outperformance by the ESPP index reflects a 343-basis point excess return to the WACC Cost of Equity for the index constituents compared to the non-ESPP index which returned 60 basis points less its WACC Cost of Equity3.

Higher Margins

While there’s a large body of anecdotal evident that suggests ESPPs have a positive effect on culture throughout the enterprise, it becomes quite clear in terms of operating margin. Companies with ESPPs have a nearly 9.5% operating margin, compared to 8.19%4 for firms which don’t offer such plans.

Less Debt, More Revenue

Along with higher margins, firms maintaining ESPPs tend to have lower debt-to-equity ratios than companies without – 134% vs. 144%, respectively. Those featuring ESPPs also experience four times the annualized sales growth, 4% to 1%.5

An Intangible Bonus

Investing in companies with Employee Stock Purchase Plans comes with a more motivated workforce. According to a study by Computershare and the London School of Economics, employees that participate in ESPPs5:

  • Work longer hours
  • Are absent less frequently
  • Are less likely to quit
  • Express greater job satisfaction

Value Creation

Companies with ESPPs have proven to create more value for shareholders than their peers. By supporting enhanced stock plan participation rates for portfolio companies, investors can accelerate value creation at companies trading at attractive multiples.

1,2,3,4 Bloomberg, EDGAR, Carver Edison Research

5 Benefits of Employee Stock Purchase Plans, Computershare and London School of Economics 2014